One of the
key tasks facing the Russian government is the creation of a single set of
economic incentives to ensure the cost-effective development of oil and gas
reserves.

Tax
revenues from the oil and gas industry, which together account for more than
half of the country’s budget revenue, have grown by an order of magnitude over
the past decade to $100 billion - a colossal figure.

The trick
now is how to figure out a way of keeping both both that money coming in while
ensuring the oil and gas industry remain in robust health.

So how can
we balance the distribution of revenue from Russia’s natural wealth between
resource companies and the state?

There are a
number of ways, such as granting investors an internal rate of return, on top
of other guarantees.

However, I
believe we should commit to allowing a healthy return on capital investments
and provide an effective tax and fiscal framework for companies to operate in.
Such an approach would both encourage economic development and allow the
country to fulfill its technological potential.

As Russia is the
world’s leading oil producer and the largest supplier of gas, encouraging
expansion of this sector should have a positive knock-on effect across the rest
of the Russian economy.

A decade
ago, Russia
introduced a new system for the oil and gas sector that facilitated tax
administration and collection, and ensured a stability cushion for the
country’s macroeconomic development.

After that
reform, the tax burden on companies in the oil sector rose from 25.1 percent of total
revenues in 1999 to 41.5 percent in 2003, increasing state budget revenues by the
equivalent of 2.7 percent of GDP.

At the
time, the tax hikes were entirely justified. But one of their consequences was
that the oil industry decided not to follow up on a number of promising
potential production technology advances. In particular, plans were shelved for
the development of hard-to-reach off-shore oil reserves because they were no
longer economically viable.

Related:

Now, aware
as we are that the existing bounty of Western Siberia is drying up, it makes
sense to think about bringing on a stream of new sites, such as the East
Prinovozemelsk field with its around 5 billion metric tons of oil and 10
trillion cubic meters of gas.

We know
that other relatively unexplored parts of Western Siberia
contain at least 2 billion metric tons of oil, and that there is a real
possibility that the true figure could be yet ten times higher.

Whereas 50
years ago there was no way of getting to such reserves, nowadays almost
anything is possible. Oil production from underneath salt deposits in deep
water is no longer a dream.

Since
operations in deep water or under ice require radically new hi-tech equipment,
the cost of developing remote fields runs to tens of billions of dollars.

The cost of
a single offshore platform, for example, can be as high as $15 billion.

Such costs
cannot be tackled alone. That is why in summer 2011, Rosneft signed an
agreement with the world’s largest private oil company, ExxonMobil, to work
together on the Arctic shelf. (Investments in the project are slated at around
$500 billion — RBI).

To be able
to carry on negotiating such deals, and to keep state revenues flowing in
strongly, let’s hope that we continue to be blessed with a favorable market
climate.